What went wrong for Fletcher Building?

It might be one of the country’s biggest companies, but Craigs Investment Partners has not had Fletcher Building among its recommended portfolios for the past decade, and that has served the investment firm well.

A series of unfortunate events, and the cyclical nature of the business, have meant its share price has fallen from about $8 a decade ago to $2.95 this week.

So what went wrong for Fletcher, and will its new chief executive and recently completed capital raise help turn it around?

A number of significant events have damaged the company in recent years.

It has been involved in a dispute over leaking pipes in Western Australia, installed between 2017 and 2022 in about 12,000 homes. At the end of August, it told the NZX it had reached a multimillion dollar settlement and would set aside A$155 million in its next financial statements to cover it.

The other major problem was the Sky City convention centre fire in 2019, which delivered a hit of hundreds of millions of dollars to its bottom line, as well as delaying the project significantly.

Fletcher also set aside $15m for possible losses from the Wellington International Airport car park project, as it worked remediate quality issues and to settle claims.

In February, the company reported a $120m loss in its half-year result and former chief executive Ross Taylor and chairman Bruce Hassall resigned.

Then in August, the company reported a $227m full-year loss and said there was another challenging year head.

At the end of last month, it announced plans to raise $700m to strengthen its balance sheet and improve financial stability and resilience “in the current challenging environment”.

Devon Funds head of retail Greg Smith said there had been an “accumulation of things” that had happened to bring Fletcher to this point.

He said there had been clear mismanagement of capital and mispricing of projects, as well as poor execution.

“There are things that are their own doing, then you combine that with the economic cycle which more recently has turned – then there’s a third category of left-field events that are maybe their fault and maybe not. There’s the pipe issue in Australia that you could say is bad luck or could say otherwise.”

Smith said although there had been the partial resolution announced with the West Australian government there were still outstanding issues to resolve with Perth building firm BGC.

“Debt levels have blown out so if you scroll forward to today they’re looking to address those debt levels with capital raising and provide some headroom to get through to the next cycle. But there are a lot of unknowns.”

He said there were some signs of green shoots for the company because the construction cycle had potentially bottomed out and conditions should improve as interest rates fell. Falling house prices, a weak construction market and interset rates at levels not seen in 15 years had all been an issue for the company.

“There’s a new chief executive, we don’t know yet how he will perform, whether he will be any better than previous management – but he is starting with a clean slate.”

Smith said it was potentially problematic that the board had not changed.

“They largely presided over the issues seen over the past decade – we haven’t seen a refresh of the board which will probably be a big question mark soon.

“The capital raise is enough to remove any questions over any threat to the balance sheet – that on its own won’t necessarily be enough, but it will provide some comfort for investors going forward.

“It will be an important step in insuring the name remains relevant.:”

John Tookey, a professor at AUT, said the company had historically had too much focus on chasing work and bidding too low.

“If you’re Fletcher, winning additional work is easy but making it pay is hard. The easiest way is to go for a low bid but the kind of work

Fletcher has historically done, big infrastructure projects, can potentially turn up a major cost overrun which is all borne by the contractor.”

He said new chief executive Andrew Reding had a sharp understanding of the industry and what the pressures were. “I would be interested to see what his plans are in terms of acquisitions.”

Lister agreed that the company had sometimes chased headline-grabbing, marquee contracts so that it could be seen to be doing them.

But that had compromised margins.

“It was more about ‘win the contract at any cost’… decisions like that have been poor and to be honest we’re not just talking about the last few years but look back through the decades and you can see evidence of that.

“The management team and board haven’t always made the right decisions, they’ve bitten off more than they can chew at times.”

Lister said the beset strategy for investors recently had been to ignore Fletcher.

“That’s’ what we’ve done. We haven’t had it in our recommended portfolios for many, many years,. At least 10 years, I suspect and we’ve come out on the right side of things. That’s kind of sad, it’s a household name, one of our biggest companies with a long and proud history. I’d like to see it do well.”

He said there was a case that now was not a bad time to invest in it. “Still for me it seems like one of those stocks that’s more of a trader’s stock than a long-term investor’s stock.”

Smith said, for investors, the company’s valuation was unquestionably cheap. “But it’s cheap for a reason. It reflects not only where we are in the cycle – other cyclical companies have performed better but are also being discounted because of the cycle – but the particular challenges Fletcher faces. With the capital raise, investors are going in with their eyes wide open.”

Smith said the strength of its market position had to mean something.

It had 96 percent of the plasterboard market and massive market share, he said. “It’s coming from a position of strength in that regard. If it can sort everything else out with that sort of market positioning, at the core there is a strong business.”